Opinion
The term "issue" in a will is to be construed in its primary meaning, heirs of the body, and includes descendants in every degree unless it appears from the context and surrounding circumstance to have been used as a word of limitation. A gift to the "then living issue" of the testatrix, to take effect at the end of lives in being and twenty-one years, does not offend the rule against perpetuities, as the word issue, so used, cannot mean descendants beyond the period of the rule. The "then living issue" in the present case is the testatrix's only living son W and does not include W's son in competition with his father. Neither the Court of Probate nor the Superior Court sitting as an appellate court of probate, has the power to determine directly and conclusively the construction to be given to wills. Whether a guardian can compromise and a Court of Probate can authorize the compromise of, a right of a minor arising under a provision of a will as a doubtful or undisputed claim under General Statutes, § 5009, quoere. In the present case the trustee, the testatrix's son W and the guardian of W's minor son entered into an agreement compromising the claims of the father and son to the remainder, under the provision of the will leaving it to the testatrix's "then living issue" after the death of the life tenant, whereby W should have the income for life and his son should have the principal at his death, and this compromise agreement was approved by the Court of Probate. Held that inasmuch as W was entitled under the will to the whole of the remainder, he was competent to enter into this agreement, and as the minor upon attaining majority may test the right of the guardian to make the agreement, which he is not likely to do as it is so obviously in his favor, this court will not now pass upon the question of its validity. A cash dividend includes all distributions of surplus assets, whether in form of cash or property, taken from the body of the assets to become the property of the stockholders. As between life tenant and remainderman cash dividends are to be regarded as income unless exceptional circumstances exist which would justify a suspension of the operation of the rule. The R. Co. conveyed to the C. Co. all its coal properties and received therefore $60,000,000 of first mortgage bonds of the C. Co. The R. Co. subsequently caused to be organized the L. Co. and transferred these bonds to it in consideration that the entire capital stock of the L. Co. should be issued pro rata to the stockholders of the R. Co. The bonds were the only assets of the L. Co. The R. Co. had spent $42,000,000 on the coal properties out of its surplus earnings and had written off by way of depletion the entire original cost of $10,000,000, so that the properties did not appear on its books as an asset. Held: 1. That the transfer of the stock of the L. Co. to the stockholders of the R. Co. was merely a means of distributing to these stockholders their proportional interest in the bonds, which were a part of the R. Co.'s surplus, and was a cash dividend. 2. That the transfer was not in the nature of a stock dividend since the R. Co. by its transfer to the L. Co. divested itself of all interest in and control over these bonds, nor was the transaction a corporate reorganization. 3. That the circumstances of the case are not so exceptional as to require the relaxation of the rule that as between life tenant and remainderman the cash dividend is to be regarded as income.
( One judge dissenting in part.)Argued April 9th, 1929
ACTION by the plaintiff, trustee under the will of Matilda M. Sherwood, late of Southport, deceased, to determine whether certain shares of stock of the Lackawanna Securities Company in its hands under a deed of trust represent income or capital, brought to the Superior Court in New Haven County and reserved by the court, John Rufus Booth, J., upon the admitted allegations of the substituted complaint, for the advice of this court.
Matilda M. Sherwood of Fairfield died October 3d 1915, leaving a will dated December 7th, 1914. She left surviving her two sons, S. wakeman Sherwood and Richard, and a grandson, Thomas T. W. Sherwood, the son of S. Wakeman Sherwood. Prior to the decease of Richard, the mother of Thomas obtained a divorce from S. Wakeman Sherwood and was awarded the custody of the son, and later married Lowell M. Clucas. Frances T. Clucas, the mother of Thomas, was, subsequent to her divorce, appointed guardian of Thomas by the Court of Probate for the district of Fairfield. The testatrix bequeathed in trust to the plaintiff Trust Company for the benefit of her son Richard during his life a one-quarter part of the residue of her property and disposed of the remainder in clause (b) of the Eleventh Article of her will which is quoted in the footnote. She also bequeathed to the Trust Company a one-quarter part of the residue for the benefit of her grandson Thomas during his life, with the power of disposal by will of such of the one quarter with its accumulations as remained at his decease.
The other one half of the residue the testatrix bequeathed to this trustee, for the benefit of her son Wakeman for his life, and upon his decease bequeathed a part of the income to the widow of Wakeman as long as she remained such and the balance of the net income to the children of Wakeman as a class for a period (this requires construction) and with provision for the disposition of the remainder (this also requires construction). The construction of neither of these provisions is essential to the questions involved in this appeal.
The other provisions of the will contained specific bequests or devises which are of no importance to the present appeal, with the exception of the Twelfth Article, which reads: "TWELFTH. If at my death or at any time thereafter the foregoing provisions of this will leave any portion of my estate, or any interest therein, intestate, I give the property or interest so left intestate to such of those persons who would then receive my husband's personal property by distribution had he just died intestate, as I might have lawfully given it to in this will, and in the shares which they would in that case receive."
Richard Sherwood died on May 23d 1919, leaving no children, and the trust created for his benefit in Article Eleventh (b) terminated. At his death he was survived by his brother Wakeman and nephew Thomas, son of Wakeman. Upon the termination of the trust, claim was made to the trustee, in behalf of Thomas and his guardian, that Thomas was entitled to one half of the principal of the trust fund of which Richard had had the life use and that Wakeman was only entitled to the other one half, and in behalf of Wakeman that he was entitled to the entire principal of this trust fund.
Each of the parties was represented by competent counsel and, after negotiations, the parties entered into the agreement known as Exhibit A, by the terms of which S. Wakeman Sherwood was to receive during his life the income from the trust fund created by section (b) of Article Eleventh, and Thomas was to receive a vested remainder interest therein subject only to this life use. S. Wakeman Sherwood was willing to enter into this agreement irrespective of what his own legal rights to the fund might be because he wished to make provision for his son and assure to him the principal of the fund. This settlement was deemed for the best interest of Thomas because it protected the principal of the fund against being dissipated by Wakeman and assured to him the entire remainder interest. The trustee, with the advice of counsel, consented to the request of the parties that it assent to this compromise and settlement provided, the guardian of Thomas should obtain from the Court of Probate for the district of Fairfield authority to enter upon this settlement, and provided, the guardian individually would in writing agree to save the Trust Company harmless from any loss or expense it might suffer or incur by reason of its consent to this compromise and settlement. The Court of Probate duly authorized the guardian to enter into this settlement and the guardian individually entered into the indemnity agreement. The Court of Probate also duly authorized the trustee to enter into the compromise and settlement. All of the parties have always been and now are satisfied with it and do not desire to raise any question as to its validity or as to the power or capacity of any of the parties to enter into it. The trustee accepted the trust created by Exhibit A, received the property and securities conveyed to it and is now acting as such trustee.
Among the securities thus conveyed were sixty-seven shares of The Delaware, Lackawanna and Western Railroad Company of the par value of $50, and the appraisal value, on June 19th, 1919, of $12,730. On July 21st, 1921, the Railroad Company declared a one hundred per cent stock dividend payable in its capital stock. The Railroad Company began the acquisition of its coal properties about 1853 and some were acquired even prior to the construction of any portion of its railroad lines. The greater part were acquired between 1865 and 1873, and more than $10,000,000 was paid for these, either in capital stock of the railroad, or from the proceeds of its stock. Between 1853 and September 1st, 1921, the Railroad Company expended approximately $42,000,000 on its coal properties and coal mining activities, this entire sum having been taken out of its surplus earnings. Between 1853 and 1907, the Railroad Company charged off on its books by way of depletion the entire cost of its coal properties and these did not appear as assets on its books, except for a small amount acquired since 1907. The Railroad Company, by reason of the Acts of Congress and the decisions of the Supreme Court of the United States, deemed it necessary that it segregate its coal properties. In pursuance of this decision it acquired the charter of the Glen Alden Coal Company; shortly thereafter the Railroad Company and the Coal Company entered into an agreement by which the Railroad Company conveyed to the Coal Company all of its coal properties for $60,000,000, in consideration of the delivery to the Railroad Company of $60,000,000 of first mortgage bonds of the Coal Company secured by a purchase money mortgage upon all of its coal properties, and the giving to the stockholders of the Railroad Company the privilege of subscribing for the stock of the Coal Company at $5 a share in the proportion of one share of its stock for each share of the Railroad Company stock held by them.
This agreement was carried out by these companies. Until this time, about September 1st, 1921, the Railroad Company had owned and operated both its coal mines and lines of railroad. Substantially all of its coal properties were acquired by the Railroad Company prior to July 7th, 1919, the date of the creation of the trust, Exhibit A, and their value was then substantially the same as at the date of their conveyance to the Coal Company. The plaintiff, as trustee, subscribed for its quota of stock in the Coal Company at $5 a share and sold the same July 23d 1921, at $34 a share, receiving therefor $2270.62, which it credited to principal, and in July, 1922, sent to S. Wakeman Sherwood a copy of its annual account as trustee showing that this had been done. On August 25th, 1927, the Railroad Company, in pursuance of a plan of reorganization, caused to be organized the Lackawanna Securities Company and transferred to it $58,500,000 of the bonds of Glen Alden Company — $1,500,000 of these bonds having matured and been paid — in consideration that the stock of the Securities Company should be issued pro rata to the stockholders of the Railroad Company, on the basis of one share of its stock for each two shares of the Railroad Company. This transaction was carried out and the plaintiff, as trustee, about September 6th, 1927, received sixty-seven shares of the capital stock of the Securities Company. Substantially the only assets of the Securities Company are the Glen Alden Coal Company bonds and the accrued interest thereon at the time of their transfer to it. The entire capital stock of the Securities Company was issued to the stockholders of the Railroad Company and no further shares have been issued. The sixty-seven shares of the Securities Company were sold in April, 1928, by the plaintiff as trustee, for $3,438.44; and substantially this sum is so invested as to be the equivalent of cash.
The questions submitted for the advice of this court are: (1) "Is the indenture of July 7th, 1919 [Exhibit A], valid and legal and did the parties thereto have power and capacity to validly enter into the same?" This question was added to the reservation in accordance with the direction of the court. (2) Whether said sixty-seven shares represent income of said trust estate so that the proceeds of the sale thereof should be paid over to the defendant S. Wakeman Sherwood, beneficiary for life of said trust fund, as part of the income of said trust fund to which he is entitled; or (3) whether said sixty-seven shares represent principal of said trust estate so that the proceeds of the sale thereof should be held, administered and invested by the plaintiff, as trustee, as part of the principal of said trust fund, and only the income thereof paid over to the defendant S. Wakeman Sherwood during his life, and upon the death of said S. Wakeman Sherwood transferred and conveyed, with the property then constituting the principal of said trust fund, to the defendant Thomas T. W. Sherwood, sole remainderman of said trust.
We take up first, the question, Did the parties to the indenture of trust, Exhibit A, have the power and capacity to validly enter into this indenture? No doubt arises as to the plaintiff Trust Company's capacity and power to enter into this contract with S. Wakeman Sherwood, or as to Wakeman's competency in years, and in capacity; so far as appears he acted without compulsion and under competent professional advice. Under such circumstances, whether he gave up his legal rights with knowledge, or whether he desired in this way to make provision for his son, so that at his own decease the principal of the trust fund might come to the son unimpaired is without legal significance. Whatever interest in this trust fund he had by way of a vested remainder was his to dispose of at will in his own lifetime, or at his own decease. The answer to question one is concerned with the right of Thomas, the minor beneficiary, or of his guardian, to contract with reference to the minor's interest in the one-quarter part of this trust fund which was given to Richard for life. By Article Eleventh the plaintiff Trust Company was given a one-quarter part of the residue for the benefit of Richard, the son of the testatrix, for life, with power in the trustee to make quarterly payments of its net income to Richard or to withhold it and itself expend the net income for his benefit. Upon his death leaving children the trustee was to pay to his children quarterly the net income during the life of the survivor of Richard and the testatrix's grandson Thomas, and for twenty-one years thereafter. Presumably the draftsman intended to use "or" for "and" after Richard and before "my grandson." If Richard dies without children or if all of his children which survive him die before the expiration of the prescribed period, the testatrix provides that the one-quarter part shall be paid to "my then living issue, discharged of the trust." Preceding the final disposition of Richard's one quarter none of the provisions of the testamentary gifts exceed the period of life or lives in being and twenty-one years and hence do not offend the rule against perpetuities. The term "issue" in a will is to be construed in its primary, and therefore presumptive meaning, heirs of the body, and includes descendants in every degree, "unless it appears from the context and surrounding circumstances to have been used as one of limitation." Middletown Trust Co. v. Gaffey, 96 Conn. 61, 66, 112 A. 689; Ansonia National Bank v. Kunkel, 105 Conn. 744, 751, 136 A. 588. But when the context or surrounding circumstances show that issue means immediate issue who may be descendants beyond children or grandchildren but not beyond the period which would bring it within the rule against perpetuities, it does not offend that rule. In this case issue cannot mean descendants beyond the period of the rule for at the instant the period terminates the principal of the trust fund vests in the "then living issue." Bartlett v. Sears, 81 Conn. 34, 39, 70 A. 33; Hoadley v. Beardsley, 89 Conn. 270, 277, 93 A. 535; Mitchell v. Mitchell, 73 Conn. 303, 47 A. 325. The "then living issue" is the only living son of the testatrix, S. Wakeman Sherwood, the brother of Richard. Daskam v. Lockwood, 103 Conn. 54, 63, 130 A. 92, 95; Manning v. Manning, 229 Mass. 527, 529, 118 N.E. 676; Jackson v. Jackson, 153 Mass. 374, 26 N.E. 1112.
If this provision should be held to be within the rule against perpetuities, under the will the principal of the trust fund would be disposed of by the residuary clause and under that go to the person or persons who would receive the testatrix's husband's personal property by legal distribution; S. Wakeman Sherwood would therefore under the residuary clause take the principal of the trust fund.
Claim was made in behalf of his son Thomas to one half of this fund and the two parties claiming an interest, acting by advice of competent legal counsel, entered into the family agreement, Exhibit A, influenced, as is apparent, by the liability of the fund being dissipated by the father and by the agreement reached, giving the father the income for life and preserving the principal of the fund for the son, making provision for what was deemed the best interests of both father and son. As we have stated, S. Wakeman Sherwood was competent to give his son Thomas his own interest in this trust fund, either with or without consideration, and either his entire interest, or that interest subject to his own life use. The authority of the guardian in this matter is governed by statute. General Statutes, § 5009, provides: "The Court of Probate . . . may authorize . . . guardians . . . to compromise and settle any doubtful or disputed claims or actions. . . ." The compromise of any right which a minor may have under a will involves the consideration of what right, if any, the minor has; the approval of the court to the guardian's compromise will involve a consideration of his right to the fund for the purpose of determining whether the compromise is one which the minor should enter into. This determination would require a consideration of the power of the Court of Probate to authorize a compromise of this nature, with the ultimate purpose of construing this statute, to ascertain whether the legislature intended to include a right arising in a provision of a will under the "claims or actions" to which this statute refers.
All of the powers of our Courts of Probate come from the statutes. Neither they nor the Superior Court sitting as an appellate court of probate have the power to determine directly and conclusively the construction to be given to wills. Chamberlain's Appeal, 70 Conn. 363, 377, 39 A. 734. Courts of Probate, however, do "possess certain incidental powers beyond the scope of those expressly confided to them, where such powers become necessary in the discharge of duties imposed upon them" or "are necessary for the adjustment of the equitable rights before the court." Hall v. Meriden Trust Safe Deposit Co., 103 Conn. 226, 230, 130 A. 157; McDonald v. Hartford Trust Safe Deposit Co., 104 Conn. 169, 190, 132 A. 902. Whether the authorization of this compromise involved a construction of this provision of the will which was incidental to the power of authorizing this compromise, or whether the exercise of such a power would, in fact, be a final adjudication of the minor's interest in this trust fund, are questions of serious moment and necessarily arise in the decision of this matter. Whether the guardian by entering into this agreement has finally compromised all right the minor had to this fund, or whether the agreement was merely a personal obligation of the guardian are also questions necessarily involved.
But whatever the answer to these questions may be, at least it is clear that this minor upon attaining his majority should then be at liberty under General Statutes, § 5073, to test the right of the guardian to make this compromise. As we construe this provision of the will the compromise agreement was extremely beneficial to the minor; his estate secured by it the remainder interest in this fund to which he was not entitled and in consideration granted the life use of this remainder interest to his father, S. Wakeman Sherwood, which he already possessed, and to which the minor had no legal interest. It is true that he can test the compromise agreement on arriving at his majority, but there is no likelihood of this happening. Nor is there likelihood of the guardian suffering a liability through having entered into the compromise agreement with the minor.
Under these circumstances, we have decided not to answer question one further than we have already done, and to leave the determination of the other questions involved in this question unanswered until such time as the rights of litigants require an answer, and we have had the subjects involved fully argued. Under our construction of the will, S. Wakeman Sherwood was the owner of the principal of this fund prior to his transfer of it and he is also entitled to the income therefrom because of Exhibit A. He has transferred by this agreement the principal of the fund to his son but retained the income therefrom. The sixty-seven shares of the Securities Company stock was a part of this fund. We are asked whether the proceeds ($3438.44) of the sale of the sixty-seven shares of the Securities Company stock are part of the income of the trust fund and payable to S. Wakeman Sherwood, or are a part of the principal of the trust fund and payable upon the death of the life beneficiary, S. Wakeman Sherwood, to Thomas T. W. Sherwood, sole remainderman of the trust fund. The conveyance of the coal properties of the Railroad Company to the Glen Alden Coal Company in consideration of the company giving the Railroad Company's stockholders the right to subscribe for the Glen Alden stock at $5 per share in the proportion of one share of the Glen Alden stock for one share of the Railroad Company stock and the issuance to the Railroad Company of $60,000,000 of the Glen Alden Coal Company bonds, was in pursuance of a sale by the Railroad Company to the Glen Alden Coal Company. So far as the record discloses both the Glen Alden Coal Company and the Railroad Company were separate corporate entities. The $60,000,000 of bonds in the treasury of the Railroad Company was a part of its surplus. It could sell the bonds and distribute the proceeds to its stockholders as a cash dividend, or it could distribute the bonds to its stockholders pro rata. In either case the dividend would be a cash dividend and be income and go to the life tenant. Green v. Bissell, 79 Conn. 547, 551, 65 A. 1056; Union New Haven Trust Co. v. Taintor, 85 Conn. 452, 83 A. 697. One and a half million of the bonds matured and were paid to the Railroad Company. Instead of selling the remainder of the bonds or distributing them as a dividend to its stockholders, it chose to cause to be organized a Securities Company and to transfer to it the $48,500,000 of bonds in consideration that the Securities Company issue its stock direct to the stockholders of the Railroad Company in the ratio of one share to every two shares of stock of the Railroad Company. The shares of stock of the Securities Company merely transferred a proportional interest in the bonds. It was another means of distributing to these stockholders their proportional interest in the bonds and gave to them what they would have obtained had the bonds been distributed to them directly. This was clearly a cash dividend which "includes all distributions of surplus assets, whether in the form of cash or property, taken from the body of the assets to become the property of the stockholders." Union New Haven Trust Co. v. Taintor, supra, at page 455. The claim that this was in the nature of a stock dividend needs no further answer than to point out the controlling fact that the Railroad Company by its transfer to the Securities Company divested itself of its interest in and control over these bonds. Nor do we think the claim in behalf of the guardian that this transaction was a corporate reorganization requires extended treatment. The finding as agreed to by the parties in interest so states, but the facts surrounding the immediate transaction show very clearly that neither in law nor fact, upon this record, can the claim be sustained. Our rule that cash dividends are to be regarded as income admits of no relaxation unless exceptional circumstances exist which would justify a suspension of its operation. Our opinion in Smith v. Dana, 77 Conn. 543, 60 A. 117, conclusively settled the law of this State. The circumstances present do not exhibit the exceptional case which would require the yielding of the rule to their powerful claim of justice. We portray in Smith v. Dana, supra, 549, the necessity and the advantages of a rule which is certain and the obstacles to be encountered and even the impossibility of administering each case upon exact equity: "The necessity for a rule which should serve as a guide and protection to trustees in the performance of their duties is apparent. The advantages of one which would make ceaseless litigation, with its attendant harassment and expense, unnecessary, are no less so. The uncertainty and difficulties attending any attempt at arriving at the true equities between parties respectively asserting income and capital interests, in the proceeds of a dividend declared, are not so readily appreciated. It requires, however, but slight reflection to discover the magnitude of the obstacles to be surmounted and the impossibility which must oftentimes be met, whereby the judicial search for precise equities necessarily becomes resolved into a speculation and a guess. There exists the ever-present difficulty of tracing financial results to their source, and of distinguishing between what of increased assets rightfully represents profits, and what represents increase of value appropriate to capital. Above all, there enters into most situations to render courts powerless to arrive at any certain results, a controlling factor arising from the discretionary power which directors rightfully exercise to determine at all times, within reasonable limits, the destiny of profits and of accumulated profits represented by surplus." See also Union New Haven Trust Co. v. Taintor, 85 Conn. 452, 83 A. 697; Stamford Trust Co. v. Yale Towne Mfg. Co., 83 Conn. 43, 75 A. 90; Bishop v. Bishop, 81 Conn. 509, 527, 71 A. 583; Green v. Bissell, 79 Conn. 547, 551, 65 A. 1056; notes, 24 A. L. R. pp. 29, 53, 93.
We answer question (1) that the indenture of July 7th, 1919 (Exhibit A), is valid so far as it concerns S. Wakeman Sherwood and that he had power and capacity to enter into Exhibit A. As to the other parties to the indenture we make no answer other than that contained in this opinion; (2 and 3) that the sixty-seven shares of Securities Company stock represent income of the trust fund and the proceeds thereof belong to and should be paid to the defendant S. Wakeman Sherwood as part of the income of the trust fund to which he is entitled. In this opinion MALTBIE, HINMAN and BANKS, Js., concurred; HAINES, J., dissented as to the conclusions in answers two and three."(b) The net income of one of said one-quarter parts shall be paid by the said trustee quarterly to my son, Richard, during his life, except that the trustee may at any and all times and from time to time at its discretion refuse to make any of the quarterly payments above mentioned to my said son, or on his order or assignment, or upon factorizing process, in which case it shall instead expend said income for his benefit itself. If my said son, Richard, dies before or after me leaving a child or children, the said trustee shall pay to said children as a class quarterly, in equal shares, the said net income during the life of the survivor of my son Richard and my said grandson Thomas and for twenty-one years thereafter, at the end of which period the principal of said one quarter shall belong to such of the children of my said son Richard as are then living, discharged of the trust. If my son Richard dies without leaving children, or if all of his children which survive him die before the expiration of the period above referred to, the principal of said one-quarter part shall be paid to my then living issue, discharged of the trust."
Decided October 25th, 1929.
Stanley Daggett, for the plaintiff.
J. Dwight Dana, for the defendants Thomas T. W. Sherwood et als. Curtiss K. Thompson, for the defendant S. Wakeman Sherwood.